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HK Overview

HK Overview. HK$ Debt Market Bonds vs. Banks Source: HKMA. Hong Kong Banking Industry. Three Tier Structure. Fully Licensed Banks -23 Locally Incorporated -108 Foreign Incorporated . Restricted License Banks - 33 RLB’s. Deposit Taking Corporations - 33 DTC’s.

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HK Overview

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  1. HK Overview

  2. HK$ Debt Market Bonds vs. BanksSource: HKMA

  3. Hong Kong Banking Industry • Three Tier Structure Fully Licensed Banks -23 Locally Incorporated -108 Foreign Incorporated Restricted License Banks - 33 RLB’s Deposit Taking Corporations - 33 DTC’s

  4. Hong Kong Banking IndustryThree Tier Structure • Fully Licensed Banks • Accept deposits of any size or maturity • 23 incorporated in HK; 114 inc. overseas. • Restricted License Banks • “principally engaged in merchant banking and capital market activities” • “may take deposits of any maturity of HK$500,000 .. and above.” • 17 incorporated in HK; 13 inc. overseas. See: http://www.info.gov.hk/hkma/eng/bank/index.htm

  5. Hong Kong Banking IndustryThree Tier Structure cont. • Deposit Taking Companies • “mostly owned by, or otherwise associated with, banks.” • “engage in a range of specialised activities, including consumer finance and securities business. “ • “may take deposits of HK$100,000 … or above with an original term of maturity of at least three months.” • 33 incorporated in HK; 0 foreign incorporated

  6. Licensed Banks dominant!Source: HKMA

  7. Most Assets Locally Incorporated

  8. Multiple Currency Deposits • Hong Kong banks accept large amounts of foreign currency deposits. • Small market for Foreign currency loans in Hong Kong. • HK banks lend money to banks overseas, multinational banks lend money to firms overseas.

  9. Historical Origins In the 1950’s • Modern Local Banks • Foreign Banks • Chinese State Banks • Native Banks In 1960s, a moratorium on new entrants was instituted until 1978. From 1978-2001, new foreign banks were restricted in attracting business.

  10. Historical Origins Origins of current licensed banks can be divided into 4 categories • Modern Local Banks: Colonial banks and Chinese banks dating from pre-war period. (HSBC, Bof EA,). • International Banks – Since the 1970’s, foreign banks have been restricted from entering HK market and are limited to a maximum of 3 branches. Some multinational banks chartered in Hong Kong before that time continue to operate. (Citibank, StanChart, Bank of America)

  11. Origins, Cont. • Chinese State Banks – Chinese government set up banks in HK in pre-war era. After the revolution, these were taken over by PRC. Due to the isolation of PRC, these banks were the main link between the mainland and the world financial system (Bank of China, Nanyang Commercial) • Native Banks – Banks that serviced the rapidly growing retail markets for small deposits and loans during the immediate post-war migration of immigrants from the mainland (Hang Seng, Wing Lung, Dao Heng and many others)

  12. Regulatory Framework • Before 1948, banking industry was laissez faire. Only issuance of currency was regulated. • Banking Ordinance of 1948 put minimal regulation in place (largely forced on colonial government by KMT worries about HK banks being used for illegal purposes). • Since that time, HK banking history has been one of crisis and response.

  13. In early 1960’s, many bank runs at native banks that were engaged in margin lending related lending activities forced government bailouts after stock market collapsed. Appointment of Commissioner of Banking Banks were required to keep liquid or liquifiable assets (i.e. government securities) equal to at least 25% of their liquid liabilities (i.e. bank deposits). Banking investments were curtailed. Ability of banks to invest in land or equity of other businesses was limited to small share of banks capital. Banking Ordinance of 1964

  14. In early 1960’s, many bank runs at native banks that were engaged in margin lending related lending activities forced government bailouts after stock market collapsed. Appointment of Commissioner of Banking Banks were required to keep liquid or liquifiable assets (i.e. government securities) equal to at least 25% of their liquid liabilities (i.e. bank deposits). Banking investments were curtailed. Ability of banks to invest in land or equity of other businesses was limited to small share of banks capital. Banking Ordinance of 1964

  15. Interest Rate Cartel • During the early 1960s, there was substantial competition for loans leading to high deposit interest rates. Some blamed these interest rates for risky lending by banks which led to crisis. • Exchange Bankers Association agreed in 1964 upon a set of rules for setting deposit interest rate caps. • Hong Kong Association of banks formed in 1980 as a statuatory body to set interest rate maximum. • In July 2001, cartel completely phased out.

  16. Banking Crisis of 1965 • Crash in real estate market led to bank runs at Ming Tak, Canton Trust, and Hang Seng. HSBC takes majority stake in 2nd largest deposit bank in HK, Hang Seng. • To further eliminate “competitive” behavior, banking ordinance is changed to require explicit license from Commissioner of Banking. • Commissioner imposes moratorium on new banking licenses until 1978 and re-imposes moratorium until 2001. • Foreign banks are limited by “one building rule” which limits them to a single branch until 1999, switched to three buildings relaxed in 2001.

  17. DTC Ordinance of 1981 • In 1970’s, inflation and interest rates start to raising interest rate spreads for banks. Banks and other companies open DTC’s to compete for funds especially to lend to real estate sector. • Law passed to create 3 tier structure and limit access of DTC’s to funds. Goes into effect in 1983. Too late • In 1982, the real estate market crashes leading many DTC’s to collapse. HSBC pledged to support well managed DTC’s ending a spreading crisis.

  18. Declining Role of Non Full Licensed Banks

  19. Banking Reform of 1986 • In 1985, a large number of banks take losses on risky lending. Several banks must be bailed out by government/HSBC • Commissioner of Banking given ad hoc powers to regulate bank lending. • Banks are required to keep capital equal to 8% of risk weighted assets.

  20. High Concentration Top firms control a huge fraction of banking assets, 2005

  21. Consolidation: Recent years have seen the merger of smaller banks.

  22. Challenge for HK Banks • Hong Kong economy has shifted toward entrepot trade. • HK businesses are integrating with mainland. • HK Banks cannot integrate fully due to Chinese regulations. • End of 2006, Foreign Banks can incorporate in China and 12 HK institutions have.

  23. More reliance on property, less on commercial loans.

  24. Lending by Sector

  25. Rebound of Lending to China

  26. Reading List • KPMG Banking Survey Report 2007 • Schenk, C. Banking Crises and the Evolution of the Regulatory Framework in Hong Kong 1945-70’, Australian Economic History Review, 43(2), July 2003. Article • Schenk, C., Hong Kong as an International Financial Centre: emergence and development 1945-65, Routledge, 2001 • HKMA • GUIDE TO HONG KONG MONETARY AND BANKING TERMS. 3RD EDITION  • Annual Report: Banking Stability

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